Fixed Income

In the course of 2016 investors witnessed a reshaping of the political environment that has made the world’s and Europe’s current challenges seem bigger than they have for a long time.

The risks ahead are numerous. Recent events have reminded us of the difficulty of making predictions about the future. The political stakes seem to be getting higher. Questions are being posed about how the European Union and the euro (EUR) are going to evolve. Under such circumstances, investors are well advised to consider how they diversify their investments.

Diversify within Europe?

Non-EUR currencies within geographical Europe and partly within the European Union provide exposure to economies that are closely tied to the European Union, but at the same time offer upside potential should there be any unforeseen political events in continental Europe this year.

This happened before, during the eurozone’s financial crisis

When we look back to the financial crisis in the eurozone, the Nordic currencies were used as diversification vehicles out of the euro. Assets were invested in Swedish krona (SEK) and Norwegian krone (NOK). The Danish krone is pegged to the euro and for that reason did not lend itself for use as a diversification vehicle.

The SEK and the NOK appreciated throughout the eurozone financial crisis. Their appreciation was very distinct from that of the Polish zloty (PLN) or the British pound (GBP). It went on, more or less, until the European Central Bank (ECB) announced the Outright Monetary Transactions (OMT) or bond-buying programme on 6 September 2012. From that moment on, markets’ confidence in the euro relative to the SEK and the NOK increased.

Exhibit 1: The Swedish krona and Norwegian krone appreciated against the euro throughout the eurozone crisis between 2009 and September 2012 – the graph shows changes in the exchange rates of the Norwegian krone (NOKEUR), Swedish krona (SEKEUR), Polish zloty (PLNEUR) and British pound (GBPEUR) against the euro, where the grey vertical line represents the ECB’s OMT announcement on 6 September 2012.

Source: Alfred Berg, Bloomberg, as of 1 February 2017

History doesn’t repeat itself but it often rhymes. Relative to the euro, the Swedish krona is close to the levels at which it traded prior to the eurozone’s financial crisis and the Norwegian krone is now much weaker. The relative weakness of Norway’s currency to that of Sweden is explained mainly by the fall in oil prices.

In addition, both Sweden and Norway are members of a very exclusive (currently only seven members) global Standard & Poor’s ‘AAA’ rated-sovereign club:

Europe – Non-EUR and Non EUR-pegged currencies:

Norway – Stable outlook

Sweden – Stable outlook

Switzerland – Stable outlook

Europe – EUR and EUR-pegged currencies:

Denmark – Stable outlook

Germany – Stable outlook

Luxembourg – Stable Outlook

Netherlands – Stable outlook

Rest of the World:

Australia – Negative outlook

Canada – Stable outlook

Hong Kong – Negative outlook

Singapore – Stable outlook

Source: Standard & Poor’s, 6 June 2015

There are of course many variables that impact foreign exchange rates and any one effect may at any time be cancelled by another factor pulling in the opposite direction. Historical performance is not an indicator of future performance.